If you’ve been thinking about refinancing your mortgage, but you can’t afford to pay thousands of dollars in closing costs, there’s another option to consider. Some lenders offer a no-closing-cost refinance that can benefit homeowners under certain circumstances.
How a No-Closing-Cost Refinance Works
With a traditional refinance, you pay a series of fees at closing. A no-closing-cost refinance doesn’t require an upfront payment, but the lender makes money in another way.
Instead of charging fees at closing, a lender can add the closing costs to the loan balance or charge a higher interest rate. With a no-closing-cost refinance, you will have a higher monthly payment and will pay more in interest over the life of the loan.
How to Figure out If a No-Closing-Cost Refinance Is a Good Choice
If you intend to move in the near future, a no-closing-cost refinance might be right for you. You will be able to avoid paying thousands of dollars in fees and, although your monthly payments will be higher than they would be with a traditional refinance, you won’t have to make higher payments for too long. If the additional amount that you’ll pay will be less than the closing costs that you would otherwise have to pay up front, choosing a no-closing-cost refinance can be a smart move.
A no-closing-cost refinance that adds closing costs to the loan balance can increase your loan-to-value ratio and reduce the amount of equity you have. If your equity falls below 20%, your lender may require you to purchase private mortgage insurance, which you will have to pay for every month. In that case, a no-closing-cost refinance might not make financial sense.
Shop around and Compare Terms
Contact several lenders and request quotes for both a no-closing-cost refinance and a traditional refinance. Carefully weigh the terms in each offer to figure out which is the best option for you.
When you’re looking at an offer with upfront closing costs, figure out how long it will take for the amount you will save to equal the amount you will have to pay at closing. To do that, divide the total fees by the amount you will save each month. The result is the number of months you will have to stay in the house to break even.
For a no-closing-cost refinance, figure out how much your monthly payments will increase. Think about how long you plan to stay in the house, calculate the total extra amount that you’ll pay over that period, and compare that to the sum you would have paid in upfront closing costs.
Based on the breakeven points you calculate, as well as the other refinance terms, you can decide which offer is best for you. Carefully consider all the terms before making a decision.
